Here's What's Concerning About 2CRSI's (EPA:2CRSI) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating 2CRSI (EPA:2CRSI), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What is it?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for 2CRSI, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.0048 = €500k ÷ (€157m - €54m) (Based on the trailing twelve months to February 2021).

Therefore, 2CRSI has an ROCE of 0.5%. Ultimately, that's a low return and it under-performs the Tech industry average of 7.0%.

Check out our latest analysis for 2CRSI

Above you can see how the current ROCE for 2CRSI compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for 2CRSI.

What Does the ROCE Trend For 2CRSI Tell Us?

When we looked at the ROCE trend at 2CRSI, we didn't gain much confidence. Around three years ago the returns on capital were 41%, but since then they've fallen to 0.5%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a related note, 2CRSI has decreased its current liabilities to 34% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From 2CRSI's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for 2CRSI. These growth trends haven't led to growth returns though, since the stock has fallen 55% over the last three years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

On a final note, we found 3 warning signs for 2CRSI (1 shouldn't be ignored) you should be aware of.

While 2CRSI isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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